AAI becomes indirect victim of asbestos

Local defense contractor was about to be sold as part of deal for its parent

Everything's now on hold

Minor subsidiary found itself suddenly facing 10,000 asbestos claims

January 05, 2003|By Robert Little | Robert Little,SUN STAFF

The employees of AAI Corp. were supposed to be working for somebody else by now.

The unmanned airplanes and computerized simulators they make - all prized by the modern military - are the envy of gobs of potential buyers, and AAI's bosses have been eager to make a deal. Last August, when management pledged to "intensify and accelerate" efforts to sell, analysts figured the only step left was to sign the papers and count the cash.

But AAI does not have a new owner this year, despite the expectations, and no one is likely to buy it anytime soon. Instead, negotiations have stalled, the stock price of its parent company is barely half what it was, and none of the success at the Hunt Valley company can make its dilemma disappear.

AAI's troubles, it seem, have nothing to do with its defense industry future, which remains promising. Rather, its problems stem from the long-ago past of an industrial manufacturing company in southern Michigan, owned by the same corporate parent as AAI, that pioneered the use of coal-burning furnaces for making steam power 103 years ago.

That company - Detroit Stoker Co. - once sold products that contained asbestos. And the engineers, technicians, programmers, high-tech military specialists and the rest of the 900 employees of AAI Corp. may never live it down.

"There is continued interest in the company, in the whole or some of its parts," said James H. Perry, chief financial officer of United Industrial Corp., the parent company of both AAI and Detroit Stoker. "Clearly, though, the asbestos issue has complicated the process."

Defense industry watchers often forget the name United Industrial Corp. Based in a small Manhattan office, far removed from any of the engineers or factory workers that keep it in business, United Industrial exists largely to oversee the Maryland subsidiary that earns more than 90 percent of its revenue.

Once known as Aircraft Armaments Inc., AAI builds training simulators and unmanned surveillance planes and is a well-known commodity in the defense industry. Its Pioneer unmanned aircraft was one of the first used in combat, and its latest, the Shadow, is about to enter full production for the U.S. Army, a first for any aircraft of its kind.

In April, under pressure from shareholders, United Industrial executives announced that they had hired an investment bank to pursue the sale of the company either in whole or in parts.

Thanks to AAI, the company is considered an attractive takeover target and executives expected few complications. They predicted privately that a deal would be announced by the end of 2002.

But the effort to sell has since morphed into a stinging reminder that United Industrial is more than just AAI wrapped in a different name and a swankier locale. Potential buyers also have to deal with Detroit Stoker, the company's lesser-known and troubled stepchild.

Detroit Stoker makes equipment used in furnaces, boilers and various industrial-grade heating and power-generation systems. It is a remnant of United Industrial's decades-old flirtation with expansion, and employs roughly 160 people in the suburban community of Monroe, Mich. Today, it is the only non-defense-related enterprise that United Industrial owns.

Like virtually every company that built boilers and furnaces in the 20th century, Detroit Stoker once used asbestos. It never milled or manufactured the heat-resistant material, and stopped using it altogether in 1981, but the company delivered enough asbestos-laden products over the years that it has long been a target of lawsuits from cancer victims who think their illness is linked to Detroit Stoker products.

Until recently United Industrial treated the litigation mostly as an afterthought, one that "will not have a materially adverse effect on the company's financial position," according to documents filed with the Securities and Exchange Commission.

During most of the past five years, the legal fees and other costs of asbestos litigation amounted to $467,000, according to company documents - not enough to raise concern.

But in September and October of last year, just as negotiations with a potential buyer of United Industrial were entering the late stages of "due diligence," according to a company source, the asbestos litigation industry seemed to rediscover Detroit Stoker.

In two months, roughly 8,300 asbestos-related claims were filed against Detroit Stoker in courthouses scattered around Louisiana, Michigan, Mississippi, Ohio, New York and North Dakota. At year's end the company had nearly 10,000 claims filed against it.

Nothing had changed at Detroit Stoker - no devastating developments or revelations that suddenly made it prime target for "toxic torts." Legal experts say the company was probably just the next defendant in line. Manufacturers of asbestos have long since gone bankrupt, and asbestos attorneys throughout the country have moved on to suing secondary targets such as Detroit Stoker.